Many books on investing explain the rule of 72, which makes it easy to estimate how long it takes for an investment to double at a given rate of growth. In most of these books it’s presented as a bit of trivia or at best a handy math trick. In That Thing Rich People Do I show how it can be used to gain insight into key aspects of investing, including the benefits of getting started early and the importance of minimizing expenses. (more…)
Posts Tagged ‘feature’
Not Just a Math Trick
Tuesday, June 22nd, 2010Medicare Tax on Investments: First Look
Wednesday, June 16th, 2010Taxation of investments will undergo one of its most significant changes ever in 2013, when the Medicare tax is set to begin applying to investment earnings of higher-income individuals. Although this tax is years away, investors and their advisors need to be planning for it now as it will affect strategic decisions they make this year, including Roth conversions and capital gain realizations. Here’s a first look at the new tax. (more…)
Muddled Thinking on Roth Conversions
Monday, June 14th, 2010I couldn’t possibly comment on every article that comes out on Roth conversions. My Google alert for that topic comes up with so many entries on a daily basis that it would be a full-time job just to read them all. The vast majority reflect muddled thinking on the subject. Today’s piece in the Wall Street Journal on reasons not to convert is no exception. (more…)
Changing Tax Rates Affect ISO Strategy — Part II
Tuesday, June 8th, 2010In a previous post we explain why, for years prior to 2010, it was potentially advantageous for individuals holding incentive stock options with large built-in profits to adopt a strategy under which they sell 65% of the shares immediately after exercising the option and hold 35% of the shares long enough to avoid a disqualifying disposition. In this post we explain how the “35% solution” changes for options exercised in 2010, and changes again for options exercised in 2011. (more…)
More on California Registered Domestic Partners
Monday, June 7th, 2010Changing Tax Rates Affect ISO Strategy — Part I
Friday, June 4th, 2010Strategies for incentive stock options are complicated by the need to factor in the effect of the alternative minimum tax (AMT). In my writings on managing stock options — Consider Your Options, a book for option holders, and Equity Compensation Strategies, a text for professional advisors — I explain why the optimal approach from a tax perspective for people who have very large profits built into their ISOs is to sell 65% of the shares immediately after exercise of the option and hold 35% long enough to convert the profit on those shares to long-term capital gain. The “35% solution” changes when tax rates change. This is the first of two articles on how these changes affect ISO strategy for options exercised this year, given that shares not sold immediately will be taxed at next year’s capital gains rates, and for options exercised in later years, when both regular tax rates and capital gains rates will be higher.
Finanacial Advisor magazine published an article quoting us on this subject and referring to this series of articles. (more…)
Downside to IRS View of Domestic Partners
Wednesday, June 2nd, 2010The new IRS view of California registered domestic partners won’t work out to everyone’s advantage. One potential downside is highlighted in a companion (PDF) to the Memorandum described in our first post on the subject. In some situations, a member of a registered domestic partnership may find it harder to get off the hook for past tax liabilities. (more…)
New IRS Position on California Domestic Partners
Wednesday, June 2nd, 2010The IRS has released a Memorandum (PDF) from the Office of Chief Counsel changing its position on the tax treatment of registered domestic partners in California. It appears that the Memorandum’s conclusion will reduce the federal income tax for many of those couples, not only for the current year and future years, but also for years going back to 2007 for those who choose to amend past returns. The Memorandum raises a number of questions, however, and we’re awaiting clarification from the IRS on these issues. (more…)
Tax Rates and Roth Conversions
Tuesday, June 1st, 2010This is the fourth in a series of articles discussing tax rates and Roth conversions. The previous ones (here, here, and here) deal with different aspects of the question of how you determine the relevant rates: the conversion tax rate on the one hand, and the anticipated tax rate on withdrawals, or ATRW, on the other. Now we’re ready to look at the issue of how we use that information when we have it in hand. Some people have reached the mistaken conclusion that a Roth conversion never makes sense if the conversion tax rate is higher than ATRW. In reality this strategy can make sense, but generally only for relatively wealthy individuals. We’ll look first at how the strategy can be a winner for folks with lots of money, and then see how this doesn’t work for the rest of us. (more…)
